Edmund Phelps awarded Nobel prize for economic science

Prof Edmund Phelps was awarded the Nobel prize for economic science from King Carl Gustav of Sweden in Stockholm yesterday.

Prof Phelps won the award for his analysis of the conflicts involved in achieving macroeconomic policy outcomes at different points in time. His work revolutionised the understanding of one of the key relationships in economics, that between inflation and unemployment.

The so-called Phillips curve, which describes the relationship and is named after the economist who first discovered it, implies that unemployment could be reduced by policies that increase inflation. By workers adjusting wage demands to compensate for higher inflation, any positive impact of inflationary policies on unemployment would be eroded in the long run.

Prof Phelps is also credited with discovering the so-called natural rate of unemployment. His work aimed at showing that in the long run, governments could not reduce unemployment below this rate, which is normally taken to be around 4 per cent in efficient economies, but that by pursuing labour market reforms, the natural rate could be kept as low as possible.

Born in Chicago in 1933, Prof Phelps presently teaches at New York's Columbia University. The prize for economic science - which is awarded under the umbrella of the Nobel foundation - was instituted in 1968 by Sweden's central bank, Sveriges Riksbank. Its former winners have included the recently deceased monetarist economist Milton Friedman, and Princeton professor John Nash, whose work on Game Theory became the subject of an Oscar-winning film.